Boo-hoo!

We were missing that old fraudster, Alan Greenspan. What had become of him, we were wondering. The wisest, wiliest, most powerful human being on the planet seemed to have gone dark after he left his post at the Fed. We thought we'd never hear from him again.

But yesterday, the man surfaced...like a beluga whale in Canada. Speaking to a private, audience he said that the house price bubble - and incipient bust - were not his fault.

"I don't think that the boom came from a 1 per cent Fed funds rate or from the Fed's easing. It came from the collapse of the Berlin Wall," Mr. Greenspan told his listeners.

The Financial Times reports:

"The former Fed chairman said the collapse of Communism in Eastern Europe and the shift towards more market-based economies in China and other parts of the developing world brought 'billions of cheap labourers onto the scene.'"

"This," he said, "brought disinflation and lowered inflation risk premiums and long-term interest rates, creating a decline in real interest rates and equity-risk premiums." In consequence, "the real market value of assets increased faster than GDP".

There is undoubtedly some truth to what Greenspan says. But this is one of those occasions for which the word 'disingenuous' must have been invented. Yes, global integration probably has reduced inflation expectations, thus permitting lower interest rates and higher asset values. But without the active aiding and abetting of the Fed, which set the Fed Funds rate under 2% - i.e., below inflation - for 35 months, the boom in housing prices would probably never have turned into a bubble. And millions of Americans would still be solvent today. Globalization may have lowered inflation rates...permitting lower interest rates. But globalization didn't bring with it lending rates below the rate of inflation. Those negative lending rates were not imposed by Mr. Market, but by Mr. Market Manager Greenspan.

A negative lending rate is a marvel. It allows a speculator to borrow, knowing that he can repay less than he was lent. Negative lending is to the financial world what a negative-calorie dessert would be to Sara Lee or a negative-year prison sentence would be to a bank robber. You can imagine, dear reader, what mischief they would cause.

Even at low real rates of interest, a borrower has to be careful. But what kind of care is needed when you are guaranteed to make a profit, merely by borrowing?

The actual effect of the Fed's sub 2% rate is now history...well, a history that is still being written, one painful page at a time. That it brought about a huge bubble in housing prices is beyond question. It also helped sustain the whole U.S. economy...and, by extension, the economy of the whole world. Goldman Sachs calculates that since 2002, American homeowners have been able to "take out" enough money from their houses to add 2.5% a year to real GDP growth - which was most of it.

And now, it appears that the bubble is deflating. The Fed is no longer giving away money. And the housing market is no longer bestowing big gains on homeowners. The granite countertop business is slowing down...along with the rest of the housing-manufacturing complex.

If Mr. Greenspan were right, investors could expect high asset prices for a long time. Global trade, after all, is not likely to disappear any time soon. Why should house prices go down then? Or stock prices, for that matter?

But now, even the Maestro concedes house prices are going down. Only, he says, it is because houses have become unaffordable. And he guesses that the worst of the housing slump is already behind us.

And who knows? He could be right. But an investor has to play the odds. What are the odds of making serious gains in stocks at today's record prices? What are the odds of making serious gains in houses? What are the odds that Mr. Greenspan knows better?

We wait to find out.

*** The real problem, according to Forbes magazine, is not the credit derivatives...it's the credit swaps:

"If you want to fret over the next financial catastrophes, turn your gaze away from energy futures and focus on something far more obscure: credit default swaps. Hedge funds are neck-deep in these derivatives, and if something goes wrong, the pain will be widespread.

"A credit swap is an insurance policy on a bond, often a junk bond. The fellow selling the swap - writing the policy, that is - collects a premium. If nothing goes wrong, he pockets the premium and looks like a financial genius. But if the bond defaults, the swap seller has to make good. The notional amount - the aggregate of bonds, loans and other debt covered by credit default swaps - is now $26 trillion. This is a staggering sum, twice the annual economic output of the U.S.

"Selling a credit swap is equivalent to buying the corporate bond on margin," Forbes continues. "If you buy a junk bond with borrowed funds, you collect the high coupon on the bond while paying out a lower amount, presumably not too much more than what the U.S. government pays to borrow money. Either way - with a swap or a margined bond trade - you pocket the spread, unless and until the corporate bond gets into trouble, at which point you're sitting on a painful capital loss."

What is going on? We keep gazing over our shoulder and wondering about the big picture. In the late '90s, people would buy tech stocks with no earnings, no revenue and no future. And they'd lend money to companies with no means of paying them back - at a paltry one or two percentage points over U.S. Treasury yields.

They figured they couldn't go too far wrong...because interest rates were sinking...and because there was always the "Greenspan Put," the notion that if things started to slip, 'Bubbles' Greenspan would lower the cost of money even further.

Of course, the Greenspan Put didn't save the tech stocks. But it seemed to save the Dow and the economy. It arrived in the investment markets like a bottle of whisky among teenage boys. It eliminated Fear.

The confidence of the late '90s was stirred by the rout in the NASDAQ...but it was never entirely shaken. Now, speculators take bigger and bigger risks.... with more and more leverage. Derivatives, loans to Thailand and Goldman. Swaps...there is no sense of fear anywhere in the market.

But fear is alive and well in the political world. Yesterday, news spread that North Korea had exploded a nuclear bomb. While the United States squandered its military forces, fighting the least of our enemies, the greatest of them proceeded to build nuclear weapons. But, when the news exploded on the world financial markets, it turned into a dud. Gold rose a few bucks. Asian markets gasped, briefly. Then it was business as usual.

Business as usual is the way business usually is. But usual changes with the seasons and the cycles. There was a time when people had more appreciation for risk...more reluctance to invest or lend...and great fear that something would go wrong. When that sentiment comes around again - and it will - a lot of swaps, credit derivatives, house prices, mortgages and junk bonds are going to look like very bad investments.

Ask Charlie T. Munger. The vice chairman of Warren Buffett's Berkshire Hathaway describes how his company lost $404 million unwinding credit, interest-rate and foreign-exchange derivatives positions in its General Re unit:

"When we ran it off, it didn't run off at anything like book value," Munger says. "I would bet a lot of money there are some terrible valuations on the books of corporate America."

We would bet it too.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.